The new decade started with a reduction in global trade uncertainty after the U.S. and Chinese government signed the so-called phase 1 trade deal. The purchase commitments may prove difficult to deliver however, particularly in manufactured products and services.

The deal can be taken as a vindication of the Trump administration’s tariff led strategies which led to a 30.4% year over year drop in the U.S. trade deficit with China. It also led companies to slash their reliance on China, such as Superdry which cut Chinese imports by 87.3% year over year in October.

There was a further reduction in uncertainty after President Trump signed the USMCA trade deal into law.

Yet, late in the month the worries for supply chains based in China has returned with the rise of 2019-nCoV which could disrupt supply chains for over 450 U.S. importers. It could also choke off the 11.3% rebound in Chinese trade activity seen in December.

The logistics industry was already struggling with a weak end to 2019 on U.S.-inbound, seaborne shipping, while C.H. Robinson’s profitability slumped due to weak pricing conditions.

Elsewhere life carried on more-or-less as normal with Sonos suing Google in the smart speaker market – it may have missed out on 18.2% year over year growth in U.S. imports of smart speakers in the July to November 2019 period.

#1 Come for the commitments, stay for the enforcement (Jan. 16)

The U.S. and China have signed the long-awaited phase 1 trade deal, ending a process of escalation – which we’ve referred to as the Trade War Show – which has run since Aug. 2017. This report summarizes the key points of the phase 1 deal as well as providing a detailed history of the trade war so far.

The U.S. appears to make no commitments in the phase 1 document and is making only a modest roll-back to list 4A product duties from Feb. 14 – those cover $120.2 billion of imports in the 12 months to Nov. 30 where imports fell by 26.4% year over year in the three months to Nov. 30. China’s commitments meanwhile are manifold, particularly in relation to intellectual property, restrictions on foreign investment and access to financial services.

It’s the purchasing commitments however that may define the deal’s success or otherwise. Panjiva’s detailed analysis of the 548 products covered shows the commitments will be far from easy to deal with. China has committed to importing $95.5 billion of manufactured products – ranging from industrial equipment to chemicals as well as consumer goods – in 2021.

That represents an 88.4% uplift versus 2017, or $44.8 billion of extra imports. That could add 7.4% to U.S. exports of those products though many are bought by private enterprises that won’t be easily directed. The manufacturing commitment also includes semiconductors – where the U.S. is trying to limit technology development – and aerospace where China is supporting its own industry.

The enforcement process will be key to providing certainty for supply chain planning across the U.S. and China. In that regard tracking the purchase commitments should prove simple while the review process is clearly defined. However, timeframes and more importantly sanctions for review and non-compliance are by no means clear, leaving significant uncertainty about whether the deal may fall apart with little notice – indeed either party can withdraw with just six days notice.

There’s already signs of a hardening of the U.S. stance on technology with State, Commerce, Treasury and Defense already acting to restrict Chinese access to U.S. technology.

Finally, external risks to the deal are unlikely to come from the WTO – the deal may break its rules but dispute settlement is in flux – but rather from the U.S. election process where Democratic Party challengers may attempt to outflank President Trump in being tough on China.

#2 Coronavirus could disrupt supply chains for autos, electronics and chemicals (Jan. 28)

The spread of novel-variant Coronavirus (nCOV) from Wuhan in the Hubei province of China has reached nearly 4,500 cases as of Jan. 28. That’s caused the Chinese government to extend to the lunar new year break to Feb. 2 from Jan. 30 and led global firms operating in the area to put contingency plans in place.

S&P Global Ratings notes the main impact will likely be on consumer spending, though automotive and electronics supply chains also depend on the Hubei region.

Chinese automotive exports already fell by 12.6% year over year in 2019 while seaborne shipments to the U.S. having slumped 40.3% lower in 4Q due to tariffs. Indeed, one risk – albeit relatively unimportant – from nCoV disruptions is that China might not meet its 2020 purchasing commitments resulting from the phase 1 U.S.-China trade deal. With over 450 U.S. importers exposed to the Hubei region, the breadth of potential supply chain risks is clear.

Panjiva’s data shows that Hubei accounted for 27.4% of U.S. seaborne shipments from China associated with Hon Hai and 36.9% of those linked to state-owned China Electronics Corp. Firms whose U.S. imports from China may be even more exposed to the region include consumer goods maker Green Mountain Grills and performance materials producer Avantor.

The freight forwarding sector had a tough end to 2019 after U.S. seaborne imports fell by 7.1% year over year in 4Q. Among the majors only DB Schenker and DP-DHL saw growth with expansions of 8.7% and 1.8% respectively due to their reliance on European rather than Asian shipments.

The big three all saw lower shipments including a 12.9% slide in volumes handled by Expeditors. Consolidation in the industry has not helped companies grow after DSV-Panalpina’s volumes slipped 6.2% lower while Ceva Logistics – controlled by CMA-CGM – slumped 16.3%.

The latter’s performance has led CMA-CGM to restructure senior management and launch new cost controls. Ceva’s troubles are not actually focused on China – volumes shipped to the U.S. from China actually increased by 1.5% – both rather those from outside Asia which slumped by 25.5%.

#4 Corporate coronavirus reactions take wait-and-see stance, for now (Jan. 31)

The spread of novel coronavirus 2019-nCoV has reached nearly 10,000 cases and been declared a health emergency by the WTO. With 98.8% of cases in mainland China the issue for supply chains so far is predominantly one of Chinese demand and local factory operations. Regional governments have extended factory closures beyond Feb. 2 in order to control the viruses spread via the working population.

In terms of demand, the risk to the U.S.-China phase 1 trade deal should be small. It’s based on market terms while U.S. agricultural exports to China, which need to reach $33.4 billion in 2020, peak in the August to October period.

Overseas companies are starting to address the impact on just-in-time supply chains. Few are likely to make strategic supply chain decisions – as U.S. Commerce Secretary Ross has suggested they should – but may face near-term sourcing issues. Around 1-in-8 firms to hold conference calls since Jan. 20 have discussed the impact of 2019-nCoV.

Most, such as electronics maker Celestica and Textron, are taking a watching brief. Panjiva’s data can illustrate geographic exposures. U.S. seaborne imports linked to Celestica are led by China with 48.3% of the total. Those include shipments from Jiangsu and Guangdong provinces which represented 38.1% and 15.5% of the China segment respectively.

Textron is more diversified with China accounting for 27.3% of the total led by shipments with Guangdong representing 23.0% of China-U.S. shipments and Jiangsu 22.1%.

#5 Sonos disconnected from rising smart speaker market (Jan. 10)

Smart speakers are becoming an increasingly ubiquitous part of everyday life, as highlighted by announcements at CES of new products from Samsung Electronics, Royole and Voxx.

The strength of demand for speaker-type products can be seen in U.S. imports which surged 18.2% year over year in the Jul. 1 to Nov. 30 period which supplies holiday shipping demands. Suppliers from China have started to lose out with a 6.7% slide in imports in the three months to Nov. 30 versus a 84.7% surge in imports from Mexico, though that partly reflects the impact of tariff-related stockpiling late in the 2018 season and earlier in 2019.

The importance of intellectual property in smart speakers is underlined by Sonos’s petition to the U.S. government to investigate alleged IP infractions by Alphabet. That’s come after U.S. seaborne imports associated with Sonos increased by 13.6% year over year in the three months to Nov. 30. Sonos is also having to deal with tariffs – China represented 84.1% of imports linked to the firm in the past year with new supplies from Taiwan representing 14.2%.

#6 Wrong news at the right time shows success of Trump’s trade policies (Jan. 8)

U.S. trade activity fell for a third straight month in November with a 2.0% year over year slide. Services activity continued to improve while goods fell once again. Both the total and goods deficits fell to their lowest since Oct. 2016. While that’s not a positive from an economic theory perspective, it suggests the Trump administration’s tariff-led trade policies are proving successful in achieving their deficit-led objectives.

The goods deficit with China fell 30.4% to $26.4 billion, which should be supportive for relations ahead of mid-January negotiations to complete the phase 1 trade deal. Similarly the deficit versus the EU fell 13.5% ahead of mid-January talks between Commissioner Phil Hogan and Ambassador Robert Lighthizer.

The drop was the result of imports slipping for the first time in four months – a 13.7% slide in shipments of cars and a 19.7% descent in aerospace imports were the main reasons. The fly in the ointment was a 24.0% rise in the deficit with Canada and Mexico, though that’s unlikely to derail passage of the U.S.-Mexico-Canada Agreement through the U.S. Senate.

#7 Superdry bails out of China sourcing as shipments sink (Jan. 13)

Clothing seller Superdry has issued a profit warning, citing disappointing holiday season sales. While predominantly a European retailer, Superdry has also faced significant challenges in its U.S. operations. Panjiva data shows that imports to the U.S. associated with Superdry have fallen by 65.5% year over year in 4Q. Superdry’s supply chain has also been disrupted by the U.S.-China trade war.

The firm’s CFO, Nichol Gresham, has stated that it is “taking short-term and very remedial actions to stem the losses” resulting from earlier decisions to shift sourcing away from Turkey and into China.

The firm had previously shifted sourcing from both countries to a focus on China in early 2018. It has since reversed that, with an increase in U.S. seaborne imports from Turkey of 300% year over year back alongside an 87.3% decrease in imports from China in 4Q.

#8 C.H. Robinson’s slide includes European business push (Jan. 30)

Freight forwarder CH Robinson reported an 18.9% slump in revenues in Q4 due to “lower pricing across most transportation service lines”. That also led to a drop in the firm’s EBITDA margin to 4.3% from 6.8% a year earlier, echoing a similar pattern seen at FedEx and reinforcing the need for continued efficiency gains in the logistics industry.

At the start of 2020 CH Robinson faces challenges for its global forwarding business from its China exposure. China represented 58.5% of CH Robinson’s U.S. seaborne import handling in 2019 compared to 48.6% for the top 20 forwarders.

The forwarder’s U.S.-to-China volumes fell 21.2% year over year in 4Q and faces challenges from the coronavirus outbreak in Q1. CH Robinson has attempted to offset falling China volumes with those from Europe. A 21.4% rise in Europe-to-U.S. shipping compares to a 1.2% drop in volumes for all shippers, suggesting CH Robinson may have had to prioritize market share over margins.

Chart segments change in CH Robinson’s U.S. seaborne import handling by origin.  Source: Panjiva 

#9 Consumer surge, new year hold keys to China export rebound (Jan. 14)

China’s international trade activity rebounded in December with an 11.3% year over year rise being the first improvement since May. The recovery may be linked to the earlier-than-usual lunar new year as well as weak exports linked to U.S. tariff expectations a year earlier. Exports climbed 7.6% after falling by 1.1%, driven in large part by consumer goods.

Exports of textiles / apparel climbed 8.6% after falling by 3.2% a month earlier while furniture rose 17.1% after a 9.8% decline. A 7.7% rise in auto exports is somewhat curious given global auto sales are in decline. Additionally, exports of products where the early trade data does not include product granularity accounted for much of the increase in dollar terms, raising concerns about the sustainability of the recovery.

Exports to the U.S. continued to decline with an 14.5% drop – potentially supporting the U.S. Treasury Department’s decision to remove China’s currency manipulator designation – while a 7.8% surge in imports bodes well for the signing of a phase 1 trade deal this week.

#10 USMCA Watch: One hurdle left, then the hard work begins (Jan. 30)

President Trump has signed the U.S.-Mexico-Canada Agreement into law, completing a more-than-one-year process of approval since the deal was agreed by the three countries’ heads of state in 2018. The protracted timeframe provides a cautionary tale for other countries looking to sign U.S. trade deals and may lead to more “mini deals” which don’t depend on Congressional approval.

USMCA now needs to be ratified by Canada before coming into force in mid-2020. Arguably Mexico has the most to gain in securing its export base, where growth was an anemic 2.9% year over year in December. That represented a small improvement driven largely by the autos sector.

The automakers may see the most disruption from USMCA with the potential need for supply chain restructuring in response to new rules of origin for tariff-free shipping of vehicles within North America.

BMW and Volkswagen face the toughest choices – just 4.2% and 15.8% of their Mexican parts imports respectively came from the U.S. in 2019. There’s little sign of any of the major Mexican parts importers looking to pre-empt USMCA – indeed Mexican parts imports by all manufacturers fell by 20.9% year over year in December.